The new CRA Rule has a number of surprises for banks and maybe a surprise or two for the regulators themselves. One of those surprises involves the transition rules in §__.51 as they pertain to the April 1, 2024, the effective date of the new rule, the concomitant applicable date of §__.16 (the new Facility-Based Assessment Areas section), and the January 1, 2026, applicability date regarding definitions in §__.12.

On April 1, 2024, the new rule will take effect and the provisions in §__.16 will simultaneously become applicable. This will create a potential problem for a few hundred banks that will be caught between the impact of the new Facility-Based Assessment Areas and the delayed implementation of the new definitions in §__.12, specifically with respect to the size of Intermediate banks and large banks.

What we are referring to is that the new Facility-Based Assessment Areas will no longer provide for geographic flexibility wherein for decades regulators have allowed banks to adjust their assessment areas to the area they “reasonably can be expected to serve”. Any “large” bank will be denied that flexibility for the new FBAAs as of April 1, 2024. However, the new rule does allow banks of $2 billion or less size the flexibility that has been allowed for nearly 30 years. 

So, what’s the big deal?

It’s obvious that regulators intended to allow banks with $2 billion or less asset size continued assessment area delineation flexibility - and when the new rule definitions become effective on January 1, 2026, that indeed will be the case. But, between April 1, 2024, and January 1, 2026, the current CRA definition of a large bank will be operative. For 2022, “large” banks have been defined by the current CRA regulations as those with $1.503 billion or more assets. So, any bank between that size (or the new size when announced by the Agencies by year-end 2023) and $2 billion will be considered to be a large bank and will not have the flexibility that will be afforded to them on January 1, 2026.

This means for the next 2 years that banks in the roughly $1.5 billion to $2 billion asset size will be in the regulatory twilight zone, considered to be large banks to which the new FBAAs restrictions on configuration apply, but which obviously was not the size range intended by regulators. Then, on January 1, 2026, those banks will revert back to the intermediate bank category and will once again have the flexibility to adjust their CRA Facility-based assessment areas to markets less than entire counties.

Is the loss of configuration flexibility important to banks in the $1.5 billion to $2 billion asset size range?

We know when looking at Table 35 (“Estimated Institution-Level Retail Lending Test Conclusions 2018-2020”) in the new rule that smaller “large” banks are estimated to fail the new retail lending test at the institution level at nearly double the rate of the larger banks (11.4% vs 6.6.%). This very likely is due to the loss of assessment area delineation flexibility. The largest banks have many more branches in their facility-based assessment areas than the smaller “large banks”, so the reduced assessment area delineation flexibility is not likely to impact them. A good example can be found in Los Angeles County where during 2021, 99 banks operated 1,634 branches. That same year 8 “large” banks in Los Angeles each operated only 1 branch to serve the 2,498 census tracts in the county.  No one in their right mind would consider the entire county to be a market they can “reasonably be expected to serve,” but the new rule will impose that requirement on them.

Based on these considerations it’s very likely that the $1.5 billion to $2 billion banks will be unfairly impacted by the ill-considered timing of the new Facility-Based Assessment Areas and the delayed implementation of the new bank size standards. Unfortunately, there are other mistakes in the new rule that we will write about shortly.